RBA leaves cash rate unchanged at 4.5%

The RBA has resisted the temptation to increase the official cash rate, but has again warned that rates will need to rise soon to keep inflation in check.

While a growing number of economists had predicted the RBA could hike rates today, Governor Glenn Stevens has noted a number of concerns is his post-decision statement.

These include concerns about uncertainty on global financial markets and weak growth in Europe and the United States, with a particular focus on “public finances and banking systems in several smaller countries in Europe”.

Stevens says the Australian economy is growing at trend and inflation is running at around 2.75%, well inside the RBA’s target band of 2-3%.

Until this changes, the RBA is likely to remain on hold.

“The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being.”

RP Data research director Tim Lawless says the Stevens comments today suggest the housing market is no longer a big concern for the Bank, after house price fell 1.2% over the three months to August.

“Previous rate hikes have largely been aimed at cooling rapidly rising home values and the 150 basis point lift in the cash rate between October 2009 and May 2010 certainly had the desired effect on the housing market.”

“Interest rate decisions going forward are likely to be more about controlling inflation than about the housing market.”

However, Lawless says additional rate hikes in the months ahead are likely to put further pressure on the housing market, although home owners should be able to absorb this.

And higher rates might actually work in the favour of investors.

“For investors, the prospect of higher interest rates is not all bad. Higher interest rates are likely to create additional demand from renters in what is already a very tight rental market,” Lawless says.

“We are already seeing the first signs of higher weekly rents and with more prospective buyers choosing to rent rather than own the upwards pressure on rents is likely to increase yields for investors further.”